The Math Behind a Pricey College Degree

MANISHA THAKOR: With total student loans exceeding $1 trillion, one must ask “is the tassel worth the financial hassle” when it comes to spending for prestigious colleges. Here’s my rough rule of thumb for taking on student loan debt: “Think long and hard about taking on more in total student loans than you expect to earn, on average, in your first 10 years after graduating.”

That’s a mouthful so let me put some numbers on it. If you expect your average annual income over the first 10 years you are out of school to be $50,000, be really, really careful about taking on more than that amount in total student loans. What’s the logic?

View your take-home pay as a pie that totals 100%. Let’s assume 50% of your take-home pay goes for true necessities (housing, transportation, food, insurance, etc.) and are diligently setting aside 20% of your income to save for the future, you are now left with 30% of your take home pay to cover both all your discretionary expenses and those student loans. By relating the amount of debt you are willing to take on to the amount you expect to earn in a career based on that degree you can keep the payments to a level that are mathematically possible.

What doesn’t work is taking out $100,000 in loans to pursue a career that sees annual incomes cap out at $50,000. There just isn’t enough income “pie” to go around in that situation. So parents and students, please think long and hard about how you want to allocate your post-graduation income pie before selecting a school. You may decide that the extra money is worth it–but let that be a highly conscious decision you made before enrolling, not a shocking reality upon graduation.